Top DC funds to help boost investment in UK ‘patient capital’

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UK defined contribution (DC) pension schemes are to be given opportunities to invest in start ups and small, growing domestic companies as part of a policy announced by the government yesterday.

Philip Hammond, head of the UK’s treasury department, said in his annual budget report yesterday that some of the biggest DC funds had already pledged to work with the British Business Bank to invest in this sector of the economy.

Aviva, HSBC, Legal & General, NEST, The People’s Pension and the Tesco Pension Fund have signed up to work with the British Business Bank “to explore options for pooled investment in patient capital”, Hammond said.

He also stated that the Financial Conduct Authority, the UK’s financial services regulator, would launch a discussion paper later this year to explore how to put more pension money to work in “patient capital” funds.

“With total assets under management expected to exceed £1trn [€1.1trn] by 2025, defined contribution pension schemes have a vital role to play in long-term financing for UK growth and innovation,” Hammond said.

Source: UK parliament

Philip Hammond presents the UK’s 2018 budget report

Further consultations are planned for this year and next about updating rules and regulations to permit DC funds access to less liquid assets and ensure this can be done within the UK’s charge cap for DC default funds.

The changes were part of a previously announced government plan to “unlock £20bn of finance for innovative high-growth firms”, Hammond said.

Emma Douglas, head of DC at Legal & General Investment Management, praised the “significant development” in opening up illiquid asset markets for DC investors.

She added: “As the DC market continues to grow this initiative will help level the playing field for DC and defined benefit investors, with DC scheme savers able to access potential returns from investment in ‘patient capital’ assets, which traditionally have not been available to them.”

Nigel Peaple, director of policy and research at the Pensions and Lifetime Savings Association (PLSA), said: “It’s essential that all types of pension schemes can access a wide range of investments to allow them to diversify in times of uncertainty and low interest rates.”

Peaple added that the PLSA – the trade body for UK pension funds and providers – would publish guidance later this year on investing in patient capital assets.

However, those responsible for DC pension schemes needed to be wary of the risks involved in backing start-ups, according to Mark Jaffray, head of DC consulting at Hymans Robertson.

Jaffray said it was important to reduce DC schemes’ barriers to investing in illiquid assets such as infrastructure and private equity low yields and low contributions meant investment strategies “need to work harder to generate the returns required”.

“However, the chancellor’s suggestion to use DC savings to invest in growing businesses should be approached carefully if it involves start-up investment,” Jaffray warned.

“Although we are advocates of taking higher investment risk during the growth phase of the savings journey, it’s well known that over 80% of start-ups don’t succeed.

“Unlike in defined benefit, DC members carry all the risk and the last thing we need is for a high-profile failure to damage industry confidence and trust.”